Morrical v. Rogers

Filed 10/10/13
CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FIVE

ANN M. MORRICAL, Individually and as
Trustee, etc.,
Plaintiff and Respondent, A137011
v.
(San Mateo County
JESSE ROGERS et al., Super. Ct. No. CIV 513558)
Defendants and Appellants.

Siblings Michael (Mike) McGraw, John McGraw and Ann Morrical are co-equal
shareholders of a group of family corporations.1 Disputes between the siblings over the
management of these corporations led to conflicts and litigation. Mike and John
(collectively the Brothers) then entered into a series of transactions with an outside
management company and, over the objection of their sister, voted to restructure the
corporate boards of directors, granting effective corporate control to the management
company. Ann filed suit to challenge the election of new directors pursuant to
Corporations Code section 709,2 arguing that the Brothers had a material financial
interest in the transactions between the corporations and management company, and that
the transactions were unfair to the family corporations and to her as a minority
shareholder. The trial court agreed, setting aside the election of new directors and
invalidating several of the underlying corporate transactions.

1
To avoid confusion, and intending no disrespect, reference to individual
members of the McGraw family shall be by first name.
2
All statutory references are to the Corporations Code unless otherwise indicated.

1
 The primary issue presented in this appeal is whether an action brought under
section 709, which allows the court to determine the validity of an election of corporate
directors, may be based on an alleged breach of fiduciary duty or more specifically a
violation of section 310, which governs corporate transactions with companies in which
one or more corporate directors have a material financial interest. After reviewing the
plain text of the statute, its statutory context, its legislative history, and the case law
interpreting the statute, we conclude that section 709 permits a corporate electoral
challenge on such grounds.
We also conclude, however, that the trial court erred in failing to require that the
Brothers be joined in this action as indispensable parties. We therefore do not address the
merits of the judgment entered, but reverse and remand for further proceedings.
I. BACKGROUND
From the 1970‘s to the early 1990‘s, Jack McGraw, the father of Mike, John and
Ann, built the McGraw Group of Affiliated Companies (McGraw Group), companies that
originally specialized in the sale of motorcycle and watercraft insurance and later
expanded to other lines of insurance. The McGraw Group is comprised of three principal
companies: McGraw Company (McGraw), which is the managing agent that sells the
insurance and retains a share of premiums; Western Service Contract Corporation
(Western), which sells service contracts (essentially extended warranties) to the insureds;
and Pacific Specialty Insurance Company (Pacific), the actual insurer and a wholly
owned subsidiary of Western. We refer to two entities, McGraw and Western,
collectively as the Companies.
Jack and his wife, Joan, eventually transferred ownership in the Companies to
their three children, Ann, John and Mike (collectively the Siblings). The Siblings were
the sole and equal shareholders of the Companies.3 Under a ―Buy and Sell Agreement,‖
each of the Siblings had a right of first refusal to purchase any other Sibling‘s Western

3
The Siblings each transferred their shares to revocable trusts, which are now the
actual shareholders. Because the Siblings continue to exercise control over the shares as
trustees, we refer to the shareholders by the Siblings‘ names and not by the trusts‘ names.

2
shares at a discounted price before the shares could be sold to any third party. Section 7
of the agreement gave Jack and Joan a preemptive right to buy all of the Siblings‘
Western shares at an even greater discount before the Siblings could sell all of their
Western shares to a third party.
The Companies apparently have been successful.4 Between 1993 and 2011, each
sibling received approximately $53.8 million in dividends and distributions from the
Companies and, since about 2005, each sibling‘s monthly distribution has been
approximately $385,000. Nevertheless, the Siblings have been in conflict for many years
over management of the Companies.
A. 2009 Removal of Mike as Chief Executive Officer and Adoption of Phantom Stock
Plans
In the mid-1990‘s, Mike took over as chief executive officer of the Companies. In
about 2005, Mike moved to Southern California and became less involved in daily
operations, which were left to the Companies‘ long-term management team: Tim
Summers, Brian McSweeney, David Sacks, and six others. Sacks (then chief financial
officer) resigned in 2009, complaining that Mike was misusing corporate funds for
personal expenses. At the request of Ann and John, an audit was conducted, which in
Ann‘s view showed there was substantial abuse of corporate funds by Mike for personal
use. Jack and Joan attempted to negotiate a resolution of the Siblings‘ dispute and
threatened to assign or sell their preemptive rights under section 7 of the Buy and Sell
Agreement in order to pressure the Siblings to come to an agreement.
In November 2009, Ann and John voted to remove Mike as president and chief
executive officer of the Companies, and to remove Jack and two other directors from the
Pacific board. Subsequently, McSweeney was appointed president of McGraw and
Western, Summers was appointed president of Pacific, and Sacks was rehired as vice
president of corporate risk and finance.

4
The parties presented conflicting testimony at the evidentiary hearing in this
matter as to whether the Siblings‘ disputes had harmed the Companies‘ performance and
whether the Companies were as successful and well managed as they should have been.

3
 In February 2010, McGraw adopted phantom stock plans (PSP‘s) for nine of the
Companies‘ managers (including McSweeney, Summers and Sacks),5 which gave the
managers immediately-vesting equity interests in the Companies payable upon a change
in control, and which were designed as a retention and incentive tool. In the meantime,
Jack and Joan sold Mike their preemptive rights under section 7 of the Buy and Sell
Agreement for $400,000 (Section 7 Assignment). Litigation ensued.6
B. The Altamont Transactions
Defendant Altamont Capital Management, LLP (Altamont Management) is
affiliated with Altamont Capital Partners, which is represented to be a private equity firm
with $500 million in capital that focuses on investing in middle-market businesses that
have not reached their full potential. Defendants Jesse Rogers and Keoni Schwartz were
cofounders and managing directors of Altamont Capital Partners, and defendant Gene
Becker was an operating partner. Rogers had personal connections with Mike. Becker
had personal connections to Mike and Jack, and had served as a Pacific director until he
was removed along with Jack in November 2009.
In August 2011, Altamont Management proposed an investment relationship with
the Companies that would involve the purchase of one or more of the Siblings‘ shares in
the Companies. At about the same time, Altamont Capital Partners proposed a purchase
of Mike‘s shares with investment funds it managed. In December, the Brothers discussed
a sale of Mike‘s shares in the Companies to John that would be financed by Mike and an
5
The PSP‘s consisted of ―Phantom Stock Plans‖ and ―Participation Agreements‖
that benefitted McSweeney and Summers and ―Management Phantom Stock Plans‖ that
provided smaller benefits to seven other managers, including Sacks.
6
In March 2010, Mike (individually and derivatively on behalf of the Companies)
sued Ann and John for breach of fiduciary duty, conspiracy, and waste of corporate assets
due to the adoption of the PSP‘s. (McGraw v. McGraw (Super. Ct. San Mateo County,
2010, No. CIV-492464); hereafter PSP Action.) He later added McSweeney and
Summers as additional defendants. John and Ann cross-complained, alleging the
Section 7 Assignment was void and amounted to a forfeiture of Mike‘s, Jack‘s and Joan‘s
rights under section 7 of the Buy and Sell Agreement. In November 2010, Western sued
Mike for breach of fiduciary duty in purchasing the section 7 rights from the Jack and
Joan, alleging he had misappropriated a corporate opportunity.

4
Altamont entity, with that entity receiving an interest in the appreciation of certain stock.
All of these deals fell through.
On February 28, 2012, the Brothers noticed a joint special board meeting for
McGraw and Western to consider amendments to the Companies‘ articles of
incorporation and bylaws, adoption of management and director indemnification
agreements, appointment of officers, and (as to Western only) purchase of Mike‘s
Section 7 Assignment rights. John sent Ann copies of the proposed board actions, as well
as copies of agreements between the Brothers and affiliated Altamont entities
(collectively the Altamount Transactions). The Altamont Transactions, consist more
specifically of the following:
1. Expansion of the Companies’ Boards
a. Amendments to Bylaws and Articles of Incorporation
The Brothers agreed to amend the bylaws and articles of incorporation of the
Companies to increase the size of each board to eight directors and to adopt certain
―shareholder protections.‖ The protections required approval by holders of a majority of
a Companies‘ stock before the Companies or its subsidiary could take certain actions,
such as issuing new stock, incurring indebtedness greater than $25 million, or authorizing
a merger or a sale of 40 percent or more of company assets outside of the McGraw
Group.
b. Voting Agreement
Under a voting agreement, the Brothers agreed to vote their shares ―to ensure that
Altamont [Management] shall be entitled to designate five candidates to be elected as
members of the Board of Directors of [the Companies]‖ and to maintain the size of each
board at eight directors.
c. Indemnification Agreements
Indemnification agreements would be adopted for all directors.
2. Management Agreement
Under a management agreement, Altamont Management would provide McGraw,
Western, and Pacific with management, consulting, financial and other advisory services

5
for a fee of $500,000 a year. Altamont Management promised to ―devote such time and
efforts to the performance of services contemplated hereby as [Altamont Management]
deems necessary or appropriate.‖ The agreement allowed Altamont Management and its
affiliates to directly or indirectly engage in competing businesses and to withhold
potential business opportunities from the McGraw Group and pursue those opportunities
for its own or for other companies‘ benefit.
3. Payments to and by the Brothers
a. Loans by Altamont California
Altamont California Investment LLC (Altamont California) would loan $4 million
and $2 million to Mike and John respectively. The Brothers would sign nonrecourse
promissory notes promising to repay these amounts with interest by March 13, 2019, and
would pledge McGraw stock as collateral for the notes.
b. Cash Settled Stock Option Agreements (CSSOA’s)
Mike and John would give Altamont California cash-settled stock option rights in
exchange for payments of almost $2 million and $1 million respectively. Under these
agreements, Altamont California would recover a percentage of the difference between
the fair market value and the stated ―exercise price‖ for certain shares of Western and
McGraw owned by the Brothers. The exercise price was based on a valuation in excess
of $300 million for the companies. The option rights could be exercised at the end of a
seven-year term, which was extendable by up to three years at the Brothers‘ option.
c. Expense Agreement
Mike and John would pay Altamont California $1,805,000 and $645,000
respectively and amounts ―equal to the fees and expenses reasonably incurred by
[Altamont California] with respect to the [Promissory] Note[s]‖ (Expense Agreement).
d. Purchase of Section 7 Assignment
Mike would offer to sell Western the Section 7 Assignment for $500,000 to be
paid to a charitable foundation designated by Jack and Joan.

6
C. March 12, 2012 Joint Board Meeting and Election of Altamont Directors
On March 12, 2012,7 after the trial court denied Ann‘s request to enjoin the board
from adopting the Altamont Transactions, the joint board meeting took place. The boards
adopted the management and indemnification agreements and amendments to the
Companies‘ articles of incorporation and bylaws that expanded the size of the boards.8
The Western board agreed to purchase Mike‘s Section 7 Assignment. The boards then
elected five Altamont Management designees as directors of each company: Rogers,
Schwartz, Becker, John Chu, and Brian Cohen (collectively the Altamont Directors).
D. Post-Election Actions by Altamont Directors
1. Appointment of Chu as Chairman of the Boards
At a March 15, 2012 joint board meeting, the eight-member boards appointed Chu
as chairman of each board (replacing John at Western and Ann at McGraw). Chu earned
$200,000 a year for serving in this position, plus an annual bonus of $100,000 that was
guaranteed the first year and awarded at the boards‘ discretion thereafter. Cohen signed
Chu‘s contract.

7
Also on March 12, 2012, the trial court (Hon. Robert D. Foiles) considered the
Brothers‘ proposal for a settlement of the PSP Action and Western‘s suit regarding the
Section 7 Assignment. Ann opposed the settlement on the ground that it was improperly
induced by the Altamont Transactions, which the Brothers had not presented to the court.
She argued the Altamont Transactions violated the Buy and Sell Agreement and were
unfair to the Companies. The court declined to approve the settlement. ―[I]t does not
appear to be in the best interest of the company and the shareholders and is contrary to
the Buy-Sell Agreement.‖ Mike challenged the ruling by writ petition, which was denied
by Division One of this court on March 27 (McGraw v. Superior Court (Mar. 27, 2012,
A134949)).
In the meantime, Ann sued Mike, Altamont Capital Partners, and Altamont
Management for breach of contract, breach of fiduciary duty, and interference with
contract relations based in part on allegations that the Altamont Transactions violated the
Buy and Sell Agreement and Mike‘s fiduciary duties (Morrical v. McGraw (Super. Ct.
San Mateo County, 2012, No. CIV 512421); hereafter the Altamont Contract and Tort
Action)).
8
Ann originally voted no, but then changed her vote to an abstention.

7
 2. Creation of the Executive Committee
At the same meeting, the directors created an executive committee of each board
to deal with issues delegated to them by the full boards. Chu, Becker and Schwartz were
appointed to these committees, which apparently functioned as a single body (hereafter
the Executive Committee).9 The boards then authorized the Executive Committee to do
the following: consider updates to the Companies‘ bylaws; consider the sufficiency of
controls over key company functions including cash handling, accounts payable, and
regulatory communication; take any action with respect to the PSP Action deemed
necessary and in the best interest of the Companies; review the performance of managers
who were beneficiaries of the PSP‘s and then take any action necessary, including
changing personnel; and consider the composition of the Pacific board and take actions
consistent with its findings.
3. Reimbursement of Mike’s Legal Fees in PSP Action Since March 1, 2012
In April 2012, the Executive Committee decided to reimburse Mike for the legal
fees he had incurred in the PSP Action since March 1, which covered the period after
Mike said he wanted to dismiss the case. At the time of trial in the instant matter, no
reimbursement had been made.
4. Termination of McSweeney and Sacks; Hiring of Cohen
In May 2012, the Executive Committee removed McSweeney from his officer
positions at McGraw and Western and terminated Sacks. McSweeney reached a
settlement with the Companies regarding his rights under the PSP‘s, which apparently
were terminated by the Executive Committee. At the time of trial, Cohen was also trying
to negotiate a new contract with Summers that would replace the PSP‘s with a new
management incentive plan.
Cohen was made chief executive officer of McGraw, Western and Pacific. In
Ann‘s view, Cohen took over McSweeney‘s position. Cohen‘s base salary was set as the

9
These three directors were also appointed to the ―Administrative Committee‖ of
the PSP‘s to establish clear procedures relating to the plans.

8
same level as Summers‘s salary ($550,000 a year), but his potential bonuses were greater
and were guaranteed for the first year. Cohen also participated in a ―Senior Management
Incentive Program‖ that gave him a four percent interest in the McGraw Group if it was
sold for more than $300 million. Chu signed Cohen‘s contract.
5. Changes in Pacific Board of Directors
In May 2012, the Western board removed McSweeney and Summers as directors
of Pacific and elected the Altamont Directors to the Pacific board.
6. Retention of Mayer Brown
According to Ann, the Executive Committee retained the Mayer Brown law firm
and its partner, James Woods (a friend of Mike and Jack), to represent the Companies at a
cost of $1 million.
E. Section 709 Action
On May 2, 2012, Ann (both individually as a shareholder and derivatively on
behalf of McGraw and Western) sued Altamont Management and the Altamont Directors
(collectively Altamont) pursuant to section 709 (Section 709 Action).10 She asked the
court to invalidate the March 12, 2012 election and for related relief, including setting
aside all acts taken by the Altamont Directors. She argued the Brothers were disqualified
from voting in the election because they had material financial interests—due to the loans
and CSSOA‘s—in the decisions to expand the boards, elect the Altamont Directors, and
adopt the management agreement with Altamont Management, all of which she claimed
were unfair to the Companies. Ann specifically alleged that the election was invalid
under section 310.
Altamont moved for judgment on the pleadings and argued, inter alia, for
dismissal of the action because the Brothers had not been joined. The trial court (Hon.
Barbara J. Mallach) denied the motion.11 Trial took place on seven days between June 27
and July 19, 2012. At the conclusion of trial, the court granted the parties‘ request for a
10
On May 7, 2012, Ann dismissed the Altamont Contract and Tort Action.
11
The court also denied Altamont‘s motion for judgment at the close of Ann‘s
case-in-chief.

9
delay in its ruling so that settlement efforts could continue. On October 4, 2012, with a
settlement still not achieved, the court issued an oral ruling from the bench: ―The
plaintiff has the burden of proving the election of the challenged board of directors was
invalid . . . . [T]he [plaintiff‘s] position is that the voting board of directors had an
interest due to financial dealings; or in essence, were not uninterested. [¶] And the
plaintiff‘s position is that then the burden shifts to the defense to show . . . that the actions
were just and reasonable to the company. . . . [¶] . . . [T]he Court has found that the
plaintiff has met [her] burden . . . . [¶] . . . [T]he defendant[s] did not meet their . . .
burden in [showing] that the actions were just and reasonable to the company. [¶] So
therefore, . . . the Court is ruling in favor of plaintiff invalidating the election . . . and
invalidating the transfer of managerial control.‖
The court did not issue a statement of decision, noting that the parties had agreed
on the record that one would not be required.12 The written judgment declared the
March 12, 2012 election of the Altamont Directors invalid; prohibited those persons from
acting as directors for McGraw and Western, members of the Executive Committee, or
managers of the companies; and set aside ―all acts purportedly taken by [the defendants]
ostensibly on behalf of the Companies to facilitate, implement or effectuate the Invalid
Election . . . . In particular, the following actions purportedly taken in connection with,
or as a result of, the Invalid Election are adjudicated to be invalid and unenforceable:‖
expansion of the boards; appointment of the Altamont Directors as directors of McGraw,
Western and Pacific; adoption of the management and indemnification agreements;
removal of Ann as chairman of the McGraw board; appointment of Chu as chairman of
the McGraw, Western and Pacific boards; formation of, and election of three Altamont
Directors to, the Executive Committee; delegations of authority to the Executive
Committee; the engagement of Mayer Brown, and the employment of Chu and Cohen.

12
The court questioned whether a statement of decision was required in a
proceeding of this nature. Ann‘s counsel expressly agreed that no statement of decision
would be required. It is not clear that Altamont did so.

10
The court did not set aside the loans or pledge agreements, the CSSOA‘s, or the voting
agreement.
On November 8, 2012, we granted Altamont‘s petition for a writ of supersedeas
and stayed enforcement of the trial court‘s judgment pending resolution of this appeal
(Rogers v. Superior Court (Nov. 8, 2012, A137001) [nonpub. order]).
II. DISCUSSION
A. Available Grounds for a Section 709 Action
The primary issue on appeal is whether the conflict of interest and breach of
fiduciary duties raised by Ann as the grounds for her challenge to the election are proper
grounds for a section 709 action. Altamont argues the Legislature never intended that
issues as complex as breach of fiduciary duty would be adjudicated in a summary
section 709 proceeding and that doing so is a violation of due process rights. It argues
the statute was intended to adjudicate only electoral process issues such as the adequacy
of notice and the presence of a quorum at a board election, disputes over persons‘ rights
to vote, and the validity of voting agreements.13 Based on our review of the statutory
language, the legislative history of section 709, case law applying the statute and its
predecessors, and due process considerations, we reject Altamont‘s position. We
conclude that a trial court may properly consider breach of fiduciary duty and conflict of
interest allegations in determining a corporate electoral challenge brought under
section 709.
The interpretation of a statute and the resolution of a constitutional due process
issue are question of law, which this court examines independently. We are not bound by
the trial court‘s construction. (People ex rel. Lockyer v. Shamrock Foods Co. (2000)
24 Cal.4th 415, 432; Griffiths v. Superior Court (2002) 96 Cal.App.4th 757, 768.) Our
primary objective in interpreting a statute is to determine and give effect to the
underlying legislative intent. (Code Civ. Proc., § 1859.) Intent is determined foremost
by the plain meaning of the statute‘s language. If the language is clear and unambiguous,

13
Altamont repeatedly raised this argument in the trial court.

11
there is no need for judicial construction. When the language is reasonably susceptible of
more than one meaning, it is proper to examine a variety of extrinsic aids in an effort to
discern the intended meaning. (See Hughes v. Board of Architectural Examiners (1998)
17 Cal.4th 763, 775–776; State Compensation Ins. Fund v. Workers’ Comp. Appeals Bd.
(1979) 88 Cal.App.3d 43, 53.) We may consider constitutional concerns the case
presents, the statutory scheme, the apparent purposes underlying the statute, and the
presence (or absence) of instructive legislative history. (See Hughes v. Board of
Architectural Examiners, at p. 776; State Compensation Ins. Fund v. Workers’ Comp.
Appeals Bd., at p. 53.)
Section 709 provides: ―(a) Upon the filing of an action therefor by any
shareholder or by any person who claims to have been denied the right to vote, the
superior court of the proper county shall try and determine the validity of any election or
appointment of any director of any domestic corporation . . . .
―(b) Upon the filing of the complaint, and before any further proceedings are had,
the court shall enter an order fixing a date for the hearing, which shall be within five days
unless for good cause shown a later date is fixed, and requiring notice of the date for the
hearing and a copy of the complaint to be served upon the corporation and upon the
person whose purported election or appointment is questioned and upon any person
(other than the plaintiff) whom the plaintiff alleges to have been elected or
appointed . . . .
―(c) The court may determine the person entitled to the office of director or may
order a new election to be held or appointment to be made, may determine the validity,
effectiveness and construction of voting agreements and voting trusts, the validity of the
issuance of shares and the right of persons to vote and may direct such other relief as may
be just and proper.‖
It is well established that section 709 and its predecessor statutes afford an
equitable cause of action. (Braude v. Havenner (1974) 38 Cal.App.3d 526, 530 (Braude)
[discussing former § 2283].)

12
 1. Plain Language of the Statute
Contrary to Altamont‘s arguments, nothing in the plain language of section 709
restricts the grounds on which the validity of an election or appointment of directors can
be challenged.
Section 709, subdivision (a), provides without limitation that the court ―shall try
and determine the validity of any election or appointment of any director of any domestic
corporation.‖ Altamont notes that the subdivision authorizes only a shareholder or ―any
person who claims to have been denied the right to vote‖ to initiate an action under the
statute. It argues that this language implies the action is limited to voting and similar
electoral process issues. However, the plain language restricts only standing to bring an
action and says nothing about the grounds on which persons with standing may challenge
the validity of an election.
Altamont argues the summary procedures set forth in subdivision (b) imply that
the grounds for a section 709 proceeding must be restricted to technical or procedural
issues. This is not a plain language argument, but one which we address post.
Section 709, subdivision (c), also does not restrict the grounds on which the
validity of an election may be challenged. A close reading of the subdivision
demonstrates that it addresses the ―relief‖ a court may direct in a section 709 proceeding,
not the grounds on which the validity of an election or appointment may be challenged.
The subdivision includes a nonexhaustive list of appropriate forms of relief and a savings
clause that provides the court ―may direct such other relief as may be just and proper.‖ In
any event, as discussed post, the legislative history of section 709 indicates that
subdivision (c) is not a restriction on the court‘s powers under the statute.
2. Context of Statutory Scheme
Altamont argues that the placement of section 709 in chapter 7 of title 1,
division 1, of the Corporations Code, which is entitled ―Voting of Shares,‖ indicates that
section 709 was intended to remedy abridgements of the voting rights addressed in that

13
chapter.14 Indeed, Altamont argues ―[t]he surrounding statutes in chapter 7 define the
nature of the voting rights that may be adjudicated under section 709‖ (italics added), and
notes, ―[n]one of the surrounding statutes contemplate invalidating an election based on a
breach of fiduciary duties.‖ We reject the proposition that section 709 is strictly limited
to violations of rights otherwise protected in chapter 7. As the central function of
section 709 is to determine the validity or invalidity of an election or appointment of a
corporate director, we see no anomaly in its placement in a chapter on shareholder voting,
regardless of whether the statute is construed narrowly as urged by Altamont or broadly
as urged by Ann.
3. Legislative History
Altamont argues that the legislative history of section 709 and its predecessor
statutes demonstrates that the Legislature intended proceedings under the statutes to be
limited to procedural and technical challenges to the electoral process.15 We are not
persuaded.
Altamont argues the legislative history ―shows that lawmakers, over the decades,
increasingly tightened the language and scope of the statute to focus on the corporate
electoral process.‖ It first notes that the earliest version of the statute allowed plaintiffs to
challenge not only elections and appointments of directors, but also any ―proceeding, act,
or matter in or touching the same,‖ whereas the current statute only permits challenges to

14
Altamont cites a report of a State Bar committee that allegedly demonstrates the
drafters of a 1931 predecessor statute to section 709 intended to arrange ―the code
sections on corporations is a logical order, grouping together related matters.‖ (Rep. of
State Bar Com. on Revision of the Corporation Law (1930) 5 State Bar J., p. 38.)
Although Ann challenges the reliability of the cited report, we would presume even in the
absence of any legislative history on point that the Legislature attempts to organize
statutory schemes in a logical manner. As a general rule, we construe statutes in context,
taking into consideration chapter and division headings. (Dyna-Med, Inc. v. Fair
Employment & Housing Com. (1987) 43 Cal.3d 1379, 1387; People v. Hull (1991)
1 Cal.4th 266, 272.)
15
We grant the parties‘ three requests, filed on February 27, March 28, and
April 17, 2013, that we take judicial notice of legislative history of section 709 and its
predecessor statutes. (Evid. Code, §§ 452, 459; Cal. Rules of Court, rule 8.252(a).)

14
elections and appointments of directors. (Compare Civ. Code, former § 315
[Stats. 1850–53, ch. 128, § 15, p. 283 (authorizing action when any aggrieved person
―complain[ed] of any election held by any corporate body, or any proceeding, act, or
matter in or touching the same‖) & Stats. 1931, ch. 862, § 2, pp. 1763, 1779 (authorizing
action to challenge ―the election or appointment of a director at a meeting of shareholders
or directors‖)] with § 709, subd. (a) [authorizing action to ―determine the validity of any
election or appointment of any director of any . . . corporation‖].) While these changes
demonstrate an intent to limit the target of section 709 actions to elections and
appointments of directors, they do not demonstrate any intent to limit the grounds on
which such elections or appointments can be challenged as invalid. Because Ann‘s
action is directed at an allegedly invalid election of directors, which is appropriate under
the former and current versions of the statute, these changes also are not directly relevant
to this action.
Altamont observes that early versions of the statute allowed any aggrieved person
to bring an action, whereas the current statute only allows shareholders and those
claiming they were denied their right to vote to bring an action. (Compare Civ. Code,
former § 315 [Stats. 1850–53, ch. 128, § 15, p. 283 (any aggrieved person) & Stats. 1931,
ch. 862, § 2, pp. 1763, 1779 (shareholder)] with § 709, subd. (a) [shareholder or person
claiming denial of right to vote].) Again, these changes limit standing to bring a
section 709 action but do not limit the grounds on which an election can be challenged.
And again, because Ann is a shareholder, these changes are not directly relevant to this
action.
Finally, Altamont argues that the references to specific remedies in subdivision (c)
of the current statute (authorizing the court to ―determine the validity, effectiveness and
construction of voting agreements and voting trusts, the validity of the issuance of shares
and the right of persons to vote‖), which were added by the most recent amendment in
1975, imply an intent to limit the grounds for section 709 actions to problems with the
electoral process. (See Stats. 1975, ch. 682, § 7.) However, a treatise that Altamont itself
produced to explain the meaning of the 1975 amendment states that the text of

15
subdivision (c) was added ―[i]n order to make completely clear that [prior cases
interpreting section 709] continue to be valid authority under the new statute.‖ (1 Marsh,
Cal. Corp. Law and Practice (1977 West‘s Cal. Practice Series) § 11.3, p. 16 (Marsh).)
The treatise described those prior cases as follows: ―The cases have uniformly held that
this proceeding is equitable in nature and that the court in such proceeding will consider
all matters necessary to a determination of the validity of the contested election.‖ (Id. at
p. 13; see also id. at p. 14 & fn. 27, citing Lawrence v. I. N. Parlier Estate Co. (1940)
15 Cal.2d 220 (Lawrence).) For example, ―In Boericke v. Weise [(1945) 68 Cal.App.2d
407 (Boericke)] the court held that in such a proceeding the court could inquire into the
validity of a voting trust agreement, although collateral questions as to whether there had
been a breach of the voting trust agreement should not be injected into the case. . . .
‗[M]atters which relate solely and exclusively to the rights of the stockholders between
themselves, or between themselves and third persons, are not involved.‘ ‖ (Marsh, at
p. 15 & fn. 33.) Further confirming that the added text to subdivision (c) was not meant
to be a limitation on the court‘s remedial powers, the treatise states, ―In a proceeding
under Section 709, the court is authorized to . . . order any form of relief which may be
appropriate to do complete justice as between the parties.‖ (Marsh, at p. 16.)
We are more persuaded by the following consistent features of the statute
throughout its legislative history: (1) the court is empowered to determine the validity of
a corporate election with no express restriction on the grounds on which the validity
could be challenged; (2) the determination must be made promptly and in a summary
procedure; and (3) the court‘s remedial powers are equitable and broad. (See Civ. Code,
former § 315 [Stats. 1850–53, ch. 128, § 15, p. 283; Stats. 1877–1878, ch. 639, § 1, p. 79;
Stats. 1901, ch. 157, § 74, p. 348; Stats. 1905, ch. 416, § 9, p. 560; Stats. 1931, ch. 862,
§ 2, pp. 1763, 1779; Stats. 1933, ch. 533, § 23, p. 1371]; Corp. Code, former §§ 2236–
2238 [Stats. 1947, ch. 1038, pp. 2347–2348]; Corp. Code, § 709 [Stats. 1975, ch. 682,
§ 7, pp. 1516–1570].) In our view, nothing in the legislative history implies a restriction
on the grounds available for invalidating an election under the statute.

16
 4. Case Law
Altamont implies that the case law addressing section 709 and its predecessor
statutes confirms that the statute was always intended to apply only to errors in the
electoral process. It writes, ―[D]espite case law stretching back over a century, no case
has ever invalidated an election under section 709 for breach of fiduciary duty or a
conflict of interest.‖ (Italics omitted.) Courts have repeatedly held, however, that an
election may be challenged on any ground in a section 709 or predecessor action, and
issues comparable to breach of fiduciary duty have been decided in section 709 or
predecessor actions.
Another division of this court directly addressed the question of what issues may
appropriately be raised in a section 709 summary proceeding in Columbia Engineering
Co. v. Joiner (1965) 231 Cal.App.2d 837 (Columbia). Based on its review of the case
law under the predecessor statutes of section 709, the court concluded: ―[A]lthough
summary in nature, the actions provided for by [section 709 predecessor statutes] were
not intended . . . merely to determine the technical and procedural questions involved in a
corporation election.‖ (Columbia, at p. 844.) Rather, they provide ―for a proceeding in
equity to determine all questions which may affect the validity of a contested election.‖
(Id. at p. 849, italics added.) The only restriction is that the court will not decide issues
unrelated to the validity of the election: ―Matters of corporate behavior, dealing with
corporate management, general accounting, etc., cannot be considered unless they affect
the validity of the election.‖ (Ibid., italics added; see also Braude, supra, 38 Cal.App.3d
at p. 530.) We agree with the Columbia court‘s analysis.
In Boericke, the court held that a trial court may determine the validity of a voting
trust agreement insofar as it affects an election, but may not decide ―matters which relate
solely and exclusively to the rights of the stockholders between themselves, or between
themselves and third persons.‖ (Boericke, supra, 68 Cal.App.2d at pp. 418–420.)
Boericke also held that the equitable defenses of estoppel and unclean hands could
properly be raised in the section 709 predecessor action because the statute was remedial
and ―obviously was intended to confer upon the superior court the power to determine in

17
a summary proceeding whether or not a particular director or the entire board was or was
not properly elected or appointed in order that the corporation can properly function.‖
(Boericke, at p. 411; see also Goss v. Edwards (1977) 68 Cal.App.3d 264, 271 [court may
decide issues of laches and estoppel; ―[a]n action to defeat a corporate election is a broad-
based equity action in which the court may examine the entire transaction without being
limited to technical or procedural issues‖].) Finally, the Supreme Court held in Lawrence
that an action under a section 709 predecessor statute ―is in the nature of an equitable
proceeding in which the court will consider all matters necessary to a proper
determination of the validity of the contested election . . . .‖ (Lawrence, supra, 15 Cal.2d
at p. 227, italics added.)
Altamont argues these cases all addressed alleged irregularities or improprieties in
the election process, whereas this case does not. We disagree. The crux of Ann‘s
challenge to the election of the Altamont Directors is that the Brothers‘ exercise of their
votes pursuant to the voting agreement was tainted by breach of fiduciary duty and
conflict of interest. The evidence proffered to prove that taint—the loans, the CSSOA‘s,
and the management agreement (which had been drafted before the vote)—were no
farther afield from the election controversy than the circumstances surrounding the
execution of a voting agreement in Boericke, supra, 68 Cal.App.2d at pages 420–421; the
alleged manipulation of stock records in Lawrence, supra, 15 Cal.2d at pages 222–224,
228–231; or the history of financial transactions reviewed in Columbia, supra,
231 Cal.App.2d at pages 840, 849–858, to determine whether certain stock had been
validly issued.16

16
See also Wisler v. Wisler (1961) 198 Cal.App.2d 511, 512–514 (considering
circumstances surrounding issuance of shares); Michaels v. Pacific Soft Water Laundry
(1930) 104 Cal.App. 366, 367–368 (considering whether bank accepted stock as
collateral for a loan in good faith and in the ordinary course of its business and thus had
the right to vote the shares); Peterson v. Taggart (1934) 1 Cal.App.2d 468, 469
(considering whether a city could legally own the stock it voted in a corporate election);
Goss v. Edwards, supra, 68 Cal.App.3d at pp. 269–271 (considering whether Corp. Code
statute requiring voting agreements to be revocable at will conflicted with other statutory

18
 Moreover, courts in exercising their equitable powers in section 709 or
predecessor statute actions have decided similar issues. Lawrence involved issues of
fraud and breach of fiduciary duty. (Lawrence, supra, 15 Cal.2d at pp. 226, 230.) In
upholding a trial court order setting aside an election, the court held that a defendant
―should not have so manipulated said stock certificates as to gain any personal advantage
to himself to the detriment of either the corporation or its stockholders or the owners of
said stock,‖ citing a director‘s fiduciary duties. (Id. at p. 230.)
In Smith v. California Thorn Cordage, Inc. (1933) 129 Cal.App. 93, 98 (Smith),
the court determined the legality of an underlying contract in order to resolve a
section 709 predecessor action. (See Lawrence, supra, 15 Cal.2d at p. 227 [citing Smith
in support of statement that, in Civ. Code, former § 315 action, ―the court will consider
all matters necessary to a proper determination of the validity of the contested election‖].)
The court held, ―A casual reading of the contract at once discloses that it is a bald attempt
to usurp the powers and duties of the directors. . . . Such contracts are clearly illegal and
unenforceable in law and in equity.‖ (Smith, at pp. 98–99.)
In Kauffman v. Meyberg (1943) 59 Cal.App.2d 730, 733–734, the court looked
behind an ostensible irregularity in the issuance of a stock certificate to one of two
siblings who inherited a corporation from their father and, applying principles of fairness
and equity, upheld the trial court‘s ruling that the certificate was valid. The court noted
that friction between the siblings had apparently led the defendants to assert a technical
flaw in the stock certificate as a ―bold and piratical pretense to remove [the plaintiff]
from the presidency.‖ (Id. at p. 737.) The court held, ―Equity looks through form to
substance and on beholding the substance will require the corporation to reform its
transactions to meet the ends of justice.‖ (Id. at p. 739.)
In Braude, supra, 38 Cal.App.3d at page 529, another division of this court ruled
an election invalid under former section 2236 because the manner in which management

provisions and policies that allowed one spouse to have sole power to manage
community property company).

19
solicited vote proxies and ran the nominating process were improper. ―Incumbent
directors may not use the corporate proxy machinery solely to perpetuate themselves in
office. [Citations.] . . . [L]imits on the board‘s use of the corporate proxy machinery are
inherent in each director‘s fiduciary obligations to the members or shareholders.
[Citation.]‖ (Braude, at p. 532.)
Insofar as breach of fiduciary duty claims affect the validity of an election, they
are within the scope of the trial court‘s authority in deciding a section 709 action.17
5. Due Process Concerns and Summary Proceedings
As explained in Boericke, section 709 (and its predecessors) ―obviously was
intended to confer upon the superior court the power to determine in a summary
proceeding whether or not a particular director or the entire board was or was not
properly elected or appointed in order that the corporation can properly function.‖
(Boericke, supra, 68 Cal.App.2d at p. 411.) Altamont argues section 709 should be
construed narrowly to exclude election challenges based on alleged breaches of fiduciary
duty or conflicts of interest because adjudication of such issues in a summary proceeding
may violate a defendant‘s procedural due process rights. We are not convinced that the
narrow construction of section 709 urged by Altamont is necessary to avoid
unconstitutionality under the due process clause.
Altamont cites Wulfjen v. Dolton (1944) 24 Cal.2d 878 (Wulfjen) for the
proposition that summary procedures might deprive a defendant of his or her right to due
process of law. Wulfjen raised due process concerns about the use of money judgment
enforcement procedures to order third parties to surrender their property despite their

17
Altamont cites Clopton v. Chandler (1915) 27 Cal.App. 595 for the proposition
that motive in procuring votes in a corporate election is immaterial, implying that issues
of bad faith or breach of fiduciary duty are irrelevant in a section 709 action. In that case,
however, the officers were not charged with procuring votes in breach of fiduciary duty,
but merely in self-interest, i.e., to retain their positions in the corporation. The court
simply observed, ―It is not the motive which prompts the act, but the legality of the act
itself[,] with which the law is concerned. [Citation.]‖ (Clopton v. Chandler, at p. 601.)
An election brought about by acts that breached a director‘s fiduciary duty are not merely
self-interested but also illegal.

20
claims of superior ownership rights. (Id. at p. 890; see Blake v. Blake (1927) 86 Cal.App.
377, 380–381 (Blake), citing Code Civ. Proc., former §§ 717–720 [Stats. 1933, ch. 744,
§§ 143–146, pp. 1891–1892].) Altamont makes no effort to show that a summary
proceeding under section 709 is comparable to the summary proceeding authorized by
these statutes. It is not. The money judgment enforcement procedures permit only
examinations and orders restraining or ordering transfers of the property. (Code Civ.
Proc., former §§ 717–720; see also Code Civ. Proc., §§ 708.120, 708.130, 708.170,
708.180, 708.205, 708.210, 708.240.) In contrast, section 709 contemplates an equitable
proceeding with availability of a full evidentiary hearing.
Altamont argues that, in the context of breach of fiduciary duty or conflict of
interest claims, a section 709 summary proceeding violates a defendant‘s due process
rights ―to locate, subpoena, and present percipient and expert financial witnesses not
readily available upon five days’ notice.‖ (Italics added.) Section 709, subdivision (b)
requires the date fixed for ―the hearing‖ to be within five days of the filing of the
complaint ―before any further proceedings are had‖ and absent ―good cause shown [for] a
later date [to be] fixed.‖ However, Altamont does not establish that ―the hearing‖ is
necessarily the full trial on the complaint—and it was not in this case. The phrase
―before any further proceedings are had‖ in fact suggests that ―the hearing‖ does not refer
to full adjudication of the plaintiff‘s allegations. Even if ―the hearing‖ referred to the
trial, Altamont has not shown that the ―good cause‖ provision in the statute is insufficient
to protect a defendant‘s due process rights in a complicated case that cannot reasonably
be tried in the five-day default statutory period—as in this case. The record here shows
that the complaint was filed on May 2, 2012; the initial hearing date was set for June 25,
2012; and the actual trial took place over 7 days in June and July, concluding on July 19,
2012.
Altamont further argues the summary nature of the section 709 proceeding implies
a restriction on discovery that is incompatible with adjudication of issues like breach of
fiduciary duty and conflict of interest and that threatens defendants‘ due process rights in
those factual contexts. According to Altamont, questions about election notice, a board

21
quorum, electoral process, stock ownership, and the validity of voting agreements are
distinguishable (and thus do not raise due process concerns about summary section 709
proceedings) because they do not require development of a factual record or expert
opinions. However, the case law belies this contention. Many of the cases cited by
Altamont as appropriately decided under section 709 or its predecessor statutes involved
complex factual records regarding corporate formation and the issuance of stock (see,
e.g., Columbia, supra, 231 Cal.App.2d at pp. 840–841, 849–853 [whether corporation
received consideration for issued shares]), interactions and conflicts among the parties
prior to the contested election (see, e.g., Boericke, supra, 68 Cal.App.2d at pp. 409–417
[describing disputes over adequacy of management of family corporation by second
generation heirs]), and agreements extraneous to but arguably affecting the contested
election (see, e.g., Colburn Biological Institute v. DeBolt (1936) 6 Cal.2d 631, 635–636,
638–639 [effect of settlement agreement on election]).
Altamont argues more specifically that it was wrongfully denied discovery in this
action: ―[T]he trial court . . . overrul[ed] Defendants‘ request for even limited discovery.
[Citation.] Thus, Defendants had no opportunity to request documents or propound
interrogatories to explore Plaintiff‘s legal and factual theories. There were no depositions
of experts.[18] . . . Plaintiff also introduced volumes of exhibits stretching back over a
decade, which Defendants, as newcomers to the family drama, were in no position to
rebut.‖ Altamont, however, does not cite evidence in the record that it ever requested
additional time for discovery before trial; it simply cites a statement by counsel on the
first day of trial that no discovery had been conducted. Altamont‘s protest that, as a
stranger to the McGraw family drama, it was unable to prepare adequately for trial with
limited time is also unpersuasive in light of the record. In sum, Altamont cites no
specific prejudice it faced at trial due to the alleged denial of discovery and our extensive

18
Altamont also claims that it never received a report by Ann‘s expert, but it fails
to mention, that when Altamont raised this complaint before trial commenced, Ann‘s
counsel agreed to provide a report consistent with Code of Civil Procedure section
2034.270 requirements and the court ordered him to do so.

22
review of the trial record revealed none. Altamont fails to demonstrate either that the
trial court abused its discretion in denying it discovery or that its due process rights were
violated.19
While rejecting the specific claims advanced by Altamont on the record before us,
we do not lightly dismiss the due process concerns Altamont more broadly raises. Nor do
we disagree that sometimes complex factual disputes, not readily amendable to summary
proceedings, may require resolution when issues such as breach of fiduciary duty
underlie the electoral contest. A summary trial of complex issues without the discovery
and preparation available in ordinary civil actions may indeed result in a denial of a
party‘s substantive procedural rights and the constitutional right to due process. Trial
judges, however, have ample inherent supervisory and administrative power to ― ‗ ― ‗to
adopt any suitable method of practice, both in ordinary actions and special proceedings, if
the procedure is not specified by statute or by rules adopted by the Judicial Council‘ ‖ ‘ ‖
and ― ‗exercise reasonable control over all proceedings connected with pending litigation
. . . in order to insure the orderly administration of justice.‘ ‖ (Rutherford v. Owens-
Illinois, Inc. (1997) 16 Cal.4th 953, 967.) We are confident that a conscientious trial
judge can adequately balance the need for expedition in an equitable proceeding of this
nature with the rights of the parties to prepare and present an adequate record, and to
have a fair hearing on the merits. Altamont does not demonstrate that the trial court
failed to do so here.
6. Conclusion
In sum, we find no basis to infer an unwritten limitation on the scope of an action
under section 709 where the Legislature has not expressly provided for such a limitation.
We therefore reject Altamont‘s argument that the breach of fiduciary duty and conflict of
interest allegations on which Ann‘s election contest is based cannot be decided in the
context of a section 709 proceeding.

19
Since we conclude that retrial will be required on remand, we express no
opinion as to the propriety or necessity of discovery in any further proceedings.

23
B. Indispensable Parties
Altamont argues the judgment must be reversed because the Brothers were
indispensable parties who were not joined in the action in violation of Code of Civil
Procedure section 389. Altamont specifically argues the Brothers were indispensable
parties under Code of Civil Procedure section 389, subdivisions (a)(2) and (b). We agree
that joinder of the Brothers is required under the circumstances of this case.
Code of Civil Procedure section 389, subdivision (a)(2) provides: ―A person who
is subject to service of process and whose joinder will not deprive the court of
jurisdiction over the subject matter of the action shall be joined as a party in the action if
. . . he claims an interest relating to the subject of the action and is so situated that the
disposition of the action in his absence may (i) as a practical matter impair or impede his
ability to protect that interest or (ii) leave any of the persons already parties subject to a
substantial risk of incurring double, multiple, or otherwise inconsistent obligations by
reason of his claimed interest. If he has not been so joined, the court shall order that he
be made a party.‖ (Italics added.)20 As amended in 1971, Code of Civil Procedure
section 389 ― ‗limits compulsory joinder to those situation where the absence of a person

20
Code of Civil Procedure section 389, subdivision (b) provides: ―If a person as
described in paragraph (1) or (2) of subdivision (a) cannot be made a party, the court
shall determine whether in equity and good conscience the action should proceed among
the parties before it, or should be dismissed without prejudice, the absent person being
thus regarded as indispensable. The factors to be considered by the court include: (1) to
what extent a judgment rendered in the person‘s absence might be prejudicial to him or
those already parties; (2) the extent to which, by protective provisions in the judgment, by
the shaping of relief, or other measures, the prejudice can be lessened or avoided;
(3) whether a judgment rendered in the person‘s absence will be adequate; (4) whether
the plaintiff or cross-complainant will have an adequate remedy if the action is dismissed
for nonjoinder.‖ Here, there was never a contention that Mike and John could not be
joined as parties. Ann concedes in her briefing that the Brothers were amendable to
service of process in California. The history of litigation between the Siblings in the San
Mateo County Superior Court, including the PSP Action and the Altamont Contract and
Tort Action, further confirms that Ann could have joined the Brothers had she wished to
do so. Code of Civil Procedure section 389, subdivision (b), which lists factors which the
court must consider if a party cannot be joined, is therefore not directly applicable.

24
may result in substantial prejudice to that person or to the parties already before the
court.‘ [Citation.]‖21 (People ex rel. Lungren v. Community Redevelopment Agency
(1997) 56 Cal.App.4th 868, 875 (Lungren).)
―Whether a party is necessary and/or indispensable is a matter of trial court
discretion in which the court weighs ‗factors of practical realities and other
considerations.‘ [Citation.]‖ (Hayes v. State Dept. of Developmental Services (2006)
138 Cal.App.4th 1523, 1529.) We review a trial court‘s determinations under Code of
Civil Procedure section 389 for abuse of discretion. (Lungren, supra, 56 Cal.App.4th at
p. 875.)
As noted ante, Altamont sought dismissal of the action because the Brothers had
not been joined, albeit without significant discussion or elaboration on the issue until
after the court had pronounced its judgment. The court denied the pretrial dismissal
request without explanation.
Altamont argues the Section 709 Action would impair or impede the Brothers‘
ability to protect specific interests: the Brothers‘ interest in defending their March 2012
votes as directors, which authorized corporate changes that they believed would enhance
the value of the companies; Mike‘s interest in the board‘s directive that the Executive
Committee consider reimbursing certain of his legal fees in the PSP Action; and the
Brothers‘ interest in obtaining the benefits of (or avoiding the obligations of) the voting
agreement, the CSSOA‘s and the Expense Agreement. Altamont also argues that the

21
Altamont argues joinder of the Brothers is necessary because ―[i]t has long been
established that where ‗[a] complete determination of the controversy cannot be had
without bringing in parties to the contract or transaction who have not been named as
parties to the action in the original complaint,‘ those parties must be brought in.
(Mackenzie v. Hodgkin (1899) 126 Cal. 591, 595–596.)‖ However, this standard is no
longer good law. ―[Code of Civil Procedure s]ection 389 formerly attempted not only to
avoid prejudice to the parties or absent person but also to promote the general
convenience of the courts by preventing a multiplicity of suits. As revised, Section 389
takes a different approach; it limits compulsory joinder to those situations where the
absence of a person may result in substantial prejudice to that person or to the parties
already before the court.‖ (Cal. Law Revision Com. com., 14 West‘s Ann. Code (2004
ed.) foll. § 389, p. 419.)

25
Brothers were necessary parties because Altamont faced ―a substantial risk of incurring
double, multiple, or otherwise inconsistent obligations by reason of [the Brothers‘]
claimed interest.‖ (Code Civ. Proc., § 389, subd. (a)(2)(ii).) Specifically, Altamont
argues that ―Defendants‖ could face inconsistent obligations in subsequent litigation over
enforcement of the Altamont California loans and CSSOA‘s in light of the Section 709
Action judgment. We agree.
Ann counters that she sought no relief from her brothers, and since nothing in the
court‘s judgment adjudicated their rights, they were not indispensable parties. But Ann
ignores the theory upon which her case was grounded, the factual predicates necessary
for the court to render judgment in her favor, and the consequences of the judgment.
Ann challenged the March 12, 2012 election on the ground that it was part of a
series of transactions in which the Brothers breached their fiduciary duties as directors
and majority shareholders toward the corporation and her, the minority shareholder.
Ann‘s complaint alleged that the Brothers were disqualified from voting because they
were ―personally and materially financially self-interested in the subject matter of the
[decision to expand the board, the election of the Altamont Directors, and the adoption of
the management and indemnification agreements], and were thereby conflicted and
disqualified with respect to the voting therefor.‖ The self-interest allegedly arose from
the provision of $4 million and $2 million loans, and payment under the CSSOA‘s of
almost $2 million and $1 million, to Mike and John respectively. The complaint alleged
that these financial benefits were conditioned on the Brothers‘ agreement to elect the
Altamont Directors, adopt the management agreement, and allow Altamont to exercise
control over the day-to-day operations of the Companies. Thus, the complaint alleged
that the Altamont Transactions—including the amendments to the bylaws and articles of
incorporation expanding the boards, the voting agreement, the indemnification and
management agreements, the loans, and the CSSOAs—collectively rendered the election
invalid. Specifically, Ann argued they rendered the election invalid under section 310.
Further, Ann‘s opening trial brief provided a ―summary of basis for relief‖ in the
action: ―this statutory action under . . . section 709 seeks (a) judicial invalidation of the

26
‗election‘ of a control block of Directors designated by a company (Altamont) that paid
the aggregate sum of $9,000,000 to two ([Mike] and John) of the three existing Directors
who then purported, in their sole votes, to elect the individuals designated by the payor of
those sums (Altamont) as the controlling members of the Board, and (b) judicial
invalidation of all related activities, including the transfer of managerial control to the
payor (Altamont).‖ Ann also discussed section 310, ―which provides the standard for
evaluating interested director transactions.‖ Again, this argument identified the critical
features of her theory at trial and on appeal: the loans and CSSOA‘s, which gave the
Brothers a material financial interest in the Altamont Transactions; the causally-
connected election of the Altamont Directors (―who then purported[] . . . to elect the
individuals designated by the payor of those sums‖); and the ―related‖ adoption of the
management agreement.
It was, therefore, the Brothers’ alleged self-interest and breach of fiduciary duty to
Ann and to the Companies that formed the necessary predicate for Ann‘s challenge to the
election. And the trial court ultimately determined, in invalidating the election, that the
Brothers had a disqualifying interest ―due to financial dealings.‖ Wholly aside from any
reputational interest which the Brothers may have had at stake, the consequence of the
court‘s finding was not only to invalidate the election of the Altamont Directors, but to
declare ―invalid and unenforceable‖ the adoption of the management and indemnification
agreements. While the court did not directly set aside the loans or pledge agreements, the
CSSOA‘s, or the voting agreement, Ann‘s own complaint alleged the interrelationship of
the Altamont Transactions and that the financial benefits of the loans and the CSSOA‘s
were conditioned on the Brothers‘ agreement to elect the Altamont Directors, adopt the
management agreement, and allow Altamont to exercise control over the day-to-day
operations of the Companies. Under Ann‘s theory of the case, the consideration Altamont
received for the financial benefits provided to the Brothers was rendered a nullity,
impairing or impeding the Brothers‘ ability to protect their interests in the remaining
Altamont Transactions (and leaving Altamont subject to a substantial risk of incurring
inconsistent obligations by reason of the Brothers‘ claimed interests).

27
 ―[I]n determining whether an unjoined person is an indispensable party, potential
prejudice to that unjoined person is of critical importance.‖ (Tracy Press, Inc. v. Superior
Court (2008) 164 Cal.App.4th 1290, 1298 [applying Code Civ. Proc., § 389, subd. (b)
factors]; see also Lungren, supra, 56 Cal.App.4th at p. 880 [holding that analysis of
whether a judgment rendered in a party‘s absence might be prejudicial to the absent party
or the appearing defendants is ―essentially the same assessment‖ that must be made under
Code Civ. Proc., § 389, subd. (a)].) ― ‗ ―A person is an indispensable party if his or her
rights must necessarily be affected by the judgment. [Citations.]‖ [Citation.]‘
[Citation.]‖ (Tracy Press, Inc. v. Superior Court, at p. 1298.) The Brothers‘ rights were
necessarily affected by the judgment.
Ann insists that the Brothers‘ interests were aligned with Altamont‘s interest, and
the Brothers were therefore adequately represented in the action and not necessary
parties. But ―a common litigation objective is not enough to establish adequacy of
representation by the named parties.‖ (County of Imperial v. Superior Court (2007)
152 Cal.App.4th 13, 38.) Given the issues framed by the pleadings and in light of the
relief sought in Ann‘s complaint, it was error not to require Ann to join her Brothers as
parties, or to suffer dismissal if she failed to do so.
C. Other Issues
Because we find indispensable parties were not joined and reverse on that basis,
we need not address the court‘s rulings on the merits of the controversy and express no
opinion on those issues.
III. DISPOSITION
The judgment is reversed and the matter is remanded with instructions that the
trial court require that plaintiff Ann Morrical name and serve Michael McGraw and John
McGraw as parties to this action, or dismiss this action if she fails to do so. Each party
shall bear its own costs on appeal.22

22
Filed concurrently herewith is an order in No. A137011 dissolving the writ of
supersedeas upon issuance of the remittitur in this matter. (Cal. Rules of Court, rule
8.272.)

28
 _________________________
Bruiniers, J.

We concur:

_________________________
Jones, P. J.

_________________________
Needham, J.

29
Superior Court of the County of San Mateo, No. CIV 513558, Barbara J. Mallach, Judge.

Ropes & Gray, Rocky Chiu-Feng Tsai, Michelle L. Visser, Howard S. Glazer, Douglas
H. Hallward-Driemeier, Robert G. Jones; Gibson, Dunn & Crutcher, Daniel M. Kolkey,
Thad A. Davis, Michael Li-Ming Wong, Enrique A. Monagas, Kyle A. Withers and
Jenna Musselman Yott for Defendants and Appellants.

Reed Smith, Paul D. Fogel, Raymond A. Cardozo, Dennis P. Maio; Long & Levit,
Joseph P. McMonigle, John B. Sullivan, Glen R. Olson; Cohen & Jacobson, Lawrence A.
Jacobson and Sean M. Jacobson for Plaintiff and Respondent.

30